Breach of RMBS Repurchase Obligation not Separate Breach of Contract With Own Limitations Period

On June 11, 2015, the Court of Appeals issued a decision in ACE Sec. Corp. v. DB Structured Prods., Inc., 2015 NY Slip Op. 04873, holding that the breach of an RMBS repurchase obligation was not a separate breach of contract accruing at the time of the failure to repurchase.

In ACE Sec. Corp., the plaintiff (for which the RMBS trust on whose behalf plaintiff brought suit later was substituted) sued a sponsor of RMBS bonds for failing to "repurchase loans that allegedly did not conform to" the defendant's "representations and warranties." The defendants moved to dismiss on statute of limitations grounds. The Court of Appeals ruled that the claim for failure to repurchase the bonds was time-barred, explaining:

New York does not apply the discovery rule to statutes of limitations in contract actions. Rather, the statutory period of limitations begins to run from the time when liability for wrong has arisen even though the injured party may be ignorant of the existence of the wrong or injury. This is so even though the result may at times be harsh and manifestly unfair, and creates an obvious injustice because a contrary rule would be entirely dependent on the subjective equitable variations of different Judges and courts instead of the objective, reliable, predictable and relatively definitive rules that have long governed this aspect of commercial repose. Indeed, to extend the highly exceptional discovery notion to general breach of contract actions would effectively eviscerate the Statute of Limitations in this commercial dispute arena. We applied the same bright-line rule just three years ago in the insurance context with respect to retrospective premiums, holding that breach of contract counterclaims began to run when insurers possessed the legal right to demand payment from the insured, not years later when they actually made the demand.

The [plaintiff] does not dispute this precedent, but rather seeks to persuade us that its claim did not arise until [the sponsor] refused to cure or repurchase, at which point the Trust, either through the trustee or the certificateholders, had six years to bring suit. Thus, the Trust views the repurchase obligation as a distinct and continuing obligation that [the sponsor] breached each time it refused to cure or repurchase a non-conforming loan. Stated another way, the Trust considers the cure or repurchase obligation to be a separate promise of future performance that continued for the life of the investment (i.e., the mortgage loans).

Although parties may contractually agree to undertake a separate obligation, the breach of which does not arise until some future date, the repurchase obligation undertaken by [the sponsor] does not fit this description. To support its contrary position, the Trust relies on our decision in Bulova Watch Co. v Celotex Corp. (46 NY2d 606 [1979]), where we considered whether the separate repair clause in a contract for the sale of a roof constituted a future promise of performance, the breach of which created a cause of action. The separate clause the seller included in that contract was a 20-Year Guaranty Bond, which expressly guaranteed that the seller would at its own expense make any repairs that may become necessary to maintain said Roof.

We held that the guarantee embodied an agreement distinct from the contract to supply roofing materials, the breach of which triggered the statute of limitations anew. This was so because the defendant in Bulova Watch did not merely guarantee the condition or performance of the goods, but agreed to perform a service. That service was the separate and distinct promise to repair a defective roof — a critical component of the parties' bargain and a special, separate and additional incentive to purchase the defendant's product. Accordingly, the agreements contemplating services were subject to a six-year statute running separately for the damages occasioned each time a breach of the obligation to repair the bonded roof occurred.

The remedial clause in Bulova Watch expressly guaranteed future performance of the roof and undertook a promise to repair the roof if it did not satisfy the seller's guarantee. [The sponsor], by contrast, never guaranteed the future performance of the mortgage loans. It represented and warranted certain facts about the loans' characteristics as of March 28, 2006, when the MLPA and PSA were executed, and expressly stated that those representations and warranties did not survive the closing date. the Trust's cure or repurchase obligation was the [its] remedy for a breach of those representations and warranties, not a promise of the loans' future performance. In fact, nothing in the contract specified that the cure or repurchase obligation would continue for the life of the loans. Unlike the separate guarantee in Bulova Watch, [the sponsor's] cure or repurchase obligation could not reasonably be viewed as a distinct promise of future performance. It was dependent on, and indeed derivative of, [the sponsor's] representations and warranties, which did not survive the closing and were breached, if at all, on that date.

And it makes sense that [the sponsor], as sponsor and seller, would not guarantee future performance of the mortgage loans. A sponsor does not guarantee payment for the life of the transaction because loans may default 10 or 20 years after they have been issued for reasons entirely unrelated to the sponsor's representations and warranties. The sponsor merely warrants certain characteristics of the loans, and promises that if those warranties and representations are materially false, it will cure or repurchase the non-conforming loans within the same statutory period in which remedies for breach of contract (i.e., rescission and expectation damages) could have been sought.

If the cure or repurchase obligation did not exist, the Trust's only recourse would have been to bring an action against [the sponsor] for breach of the representations and warranties. That action could only have been brought within six years of the date of contract execution. The cure or repurchase obligation is an alternative remedy, or recourse, for the Trust, but the underlying act the Trust complains of is the same: the quality of the loans and their conformity with the representations and warranties. The Trust argues, in effect, that the cure or repurchase obligation transformed a standard breach of contract remedy, i.e. damages, into one that lasted for the life of the investment — decades past the statutory period. But nothing in the parties' agreement evidences such an intent. Historically, we have been extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include. Courts may not by construction add or excise terms, nor distort the meanings of those used and thereby make a new contract for the parties under the guise of interpreting the writing.

(Internal quotations and citations omitted).